An underwater year…

A lot of interesting investing opportunties this year are underwater. And I’m not just talking about the recent minor correction in the markets. Already this year I’ve looked at a company that aims to make money by converting wave energy into electricity and an underwater logging company. This week in the spotlight is […]

How well do retail hedge fund products hedge?

I’ve been thinking – one good thing to come out of the recent minor market meltdown is the opportunity to do some looking at retail hedge fund products and how they fared. I wrote about a few examples recently, so I was curious to see how they performed and if they’re actually meeting their […]

A spider silk coat?

No, not a Spyder coat. A recent article in wired magazine about pharming in Wired magazine brought to mind a topic that I’ve been meaning to write about for a while. Spider silk, as an advanced textile. Spider silk it turns out is ounce per ounce one of the strongest natural materials in the […]

Be your own hedge fund?

There was a small implosion on Wall Street on Tuesday, February 20th. It didn’t make the front page of most the finance and investing news websites. But there is a fascinating story around this implosion that I think is worth reviewing.
First though, a little background.

arbitrage \AR-buh-trahzh\, noun:
The nearly simultaneous purchase of a good or asset in one market where the price is low, and sale of the same good or asset in another market where the price is higher.

Hedge funds frequently make money by engaging in all kinds of arbitrage trades – mergers, convertibles, bonds, etc.
In order to cool an overheating economy the Fed began tightening the belt and raising interest rates a couple years ago. As a result an imbalance in interest rate markets occurred – one that retail investors, as opposed to hedge funds, were uniquely positioned to take advantage of. While interest rates rose Internet banks began offering high-yield FDIC insured savings accounts, offering rates of up to 5.5% in order to attract money to back mortgages. At the same time, credit card companies were offering up 0% balance transfer offers. These offers were designed to generate new customers who, presumably, would transfer balances away from other credit cards and after their promo rate expired would begin paying interest in the balances to the new company.
A funny thing happened though. The proliferation of both the 0% offers (and very loose lending standards) and the high-yield savings accounts created the opportunity for consumers to act like a hedge fund. And they have. Entire message boards are filled with people engaging in ‘App-o-Ramas’ where they apply for 10, 20, 30 different credit cards with 0% offers. Many people have been able to achieve aggregate credit lines of over $250,000. They then take the 0% money from the credit card company, drop it into a savings account and make ~5%. Simple, and relatively safe actually.
The story doesn’t end there though. People get greedy, which usually results in people getting stupid.
One enterprising guy decided that 5% wasn’t nearly enough return, and figured inflation would eat up all his profits. So, he decided that putting the money into the stock market was a better idea. And not just any stocks, but stocks with ultra high-yield dividends – Canadian Royalty Trusts. And when those stocks tanked due to tax of new regulations, he moved a lot of money into the sub-prime mortgage stocks.
And even dropping $200k of credit card money into the stocks wasn’t enough – he took out a loan, secured with the stock of the sub-prime mortgage company he was invested in, to buy more of the stock. Talk about being leveraged to the hilt.
Well, anyone that’s been reading the newspapers had to know that the sub-prime industry was in for a hit. And then, HSBC announced some bad news in early February related to the sub-prime portion of their business. At this point all signs were pointing to the exit. But money makes people stupid and a 30% dividend is hard for some people to pass up.
And then the bottom fell out. After market close on the 20th, Novastar Financial – a REIT structured sub-prime lender announced some bad news. Very bad news. In addition to having to buy back a lot of bad debt from banks, they didn’t expect to earn any taxable income until 2011 and are seriously looking at moving away from the REIT structure due to those reasons. A stock that had already fallen almost 50% since December dropped another 30% overnight.
Obviously, the gentleman in question took a big hit (I don’t believe he was 100% in Novastar, but had significant leveraged exposure). Novastar may recover eventually but he likely wont have the luxury of just waiting it out since his investment was so highly leveraged. Furthermore, he still has potential downside since he can’t afford to liquidate his full position as it’s backing the stock secured loan. Talk about a bad day.
The whole gory story plays out here – it gets interesting on page 8 of the thread.
If you want the real in-depth view on how it played out beginning to end the guy’s website is located here, where you can dig through the archives to see his thinking.
Moral to the story? Understand the difference between engaging in arbitrage and making highly leveraged high-risk investments, and definitely understand the value of a well diversified portfolio.
For a completely tangential connection – read on…

Continue reading Be your own hedge fund?

Come see the hedge fund side of Sears

In the midst of all the excitement over the Fortress Investment Group IPO, a couple people have noted that the real winner of the IPO may be none other than Sears Holdings. Sears is no longer just a stodgy retailer selling linens and Craftsman tools. It’s basically behaving if not as a hedge fund, then […]

Water, the new oil?

Quite a bit has been written recently about water being the new oil. Can a commodity as cheap and seemingly endless as water become scarce on a global level? If there was any question about that, the new UN report on global warming and climate change should put an end to that. Using Google […]

Hedge Funds for Everyone!

Continuing on the alternative investment class track, there are also some new offerings that attempt to go where no retail offerings have gone before. Into the realm of hedge funds. As has been noted countless times, during the dot-com market collapse, hedge funds performed wonderfully. This of course generated tremendous interest in hedge funds. […]

Private Equity ETFs

With the explosion in ETFs recently, there has been a flood of products aimed, or at least accessible to, individual investors that seeks to provide some of the strategies previously only avaiable to institutional or high net worth investors. On the private equity side of things, there are now two trading ETFs that seek […]

A new species of Sawfish

Triton Logging 'Sawfish' ROV - copyright Triton Loggin
Triton Logging has one of the most interesting business models I’ve heard of. They’re in the salvage business. They salvage wood.
In early 2004 I started looking for some exposure to timber stocks in my portfolio. Despite the fact that I thought housing would be heading into a downturn, I still thought it represented a good sector. Besides the nice dividends – in the 3-4% range, most of these companies sit on considerable tracts of undeveloped rural land – potentially a reasonable hedge against inflation. In addition, some of them (PCL, RYN) are structured as REITs, providing some nice tax advantages.
Now, along comes Triton, with an fascinating idea, and some cool technology to make it work. Triton aims to salvage forgotten, or inaccessible timber. Apparently there are a number of underwater forests in the world – valleys flooded by dams for example. It wouldn’t have occurred to me that the trees left behind would still be viable sources of timber, or that there would be an economically viable way or harvesting them.
But Triton has developed a reasonably cheap, submersible ROV (remotely operated vehicle), called a Sawfish, that can go down the depths, attach an airbag to the trees and fell them. Once they are floated to the surface they’re much easier to maneuver on the water than on land. The end result being, that Triton’s operation may be cheaper than a land based one.
By at least one estimate, there may be $50 billion dollars of timber trapped underwater. If privately held Triton can get access to just a small portion of that, it’ll mean serious dollars for a small startup.
Wired magazine has a great article about the company here.

Continue reading A new species of Sawfish

New Risks in Alternative Investments

Alternative investments have become popular as of late. The rise of the ETF as a preferred investment vehicle has given individual investors access to complex investment products not available at a retail level previously. Currencies, commodities and leveraged positions are just some of the products now readily tradeable. Beyond that though, true alternative investments […]